High-flying hedgies like to show off their good taste — and extreme wealth — by investing in art.
But now, as volatility in the capital markets has made credit more difficult to come by, those same managers are looking to tap all available assets, including those precious works of art, either by taking out loans against them or selling them outright, according to Crain's Financial Week.
Hedge fund managers Steven A. Cohen of SAC Capital and
Citadel Investment Group’s Kenneth Griffin, as well as their private equity counterparts Henry Kravis and Thomas H. Lee, are among the top art collectors in the world.
And while few doubt these men will survive the current turmoil, other hedgies are scrounging for cash.
Sheldon Kaye, executive vice president at asset-based lender Rosenthal & Rosenthal, said he received a half-dozen calls inquiring about seven-figure loans using art as collateral in one recent week when information about the credit markets was rocking the stock market as well.
He normally fields that many such inquiries in a month and a half.
“These are people who created a lot of wealth, bought a lot of art and now they need some money—let’s say for argument’s sake to cover margins,” said Mr. Kaye.
Mitchell Zuckerman, president of the financial services division of auction house Sotheby’s, said that his business has not experienced an increased demand for loans from financial market players but that he’s witnessed an uptick in assets being unloaded completely.
“We are seeing some selling business from hedge fund guys,” Mr. Zuckerman said. “But they’re not leveraging. Leveraging is what caused their problems.
They’re just outright selling.”
It is no small coincidence that art prices have soared as hedge fund managers have amassed huge fortunes.
A survey last year by consulting firm Prince & Associates and trade publisher MARHedge, which polled almost 300 managers with a median net worth of more than $60 million, found the average respondent spent nearly $4 million on fine art in 2005.
How great of an impact the woes of the equities markets will have on art prices is yet to be seen, but there are some signs of concern.
In a regulatory filing last month, Sotheby’s said that its board of directors set a new limit of $500 million in guarantees, or minimum prices promised to sellers. Additionally, the share price of Sotheby’s, the only publicly traded auction house, was off roughly 24% last week from its 52-week high of $53.99, reached on July 16.
The coming weeks and months will be a test of how well art prices will hold up without Wall Street money flowing into the market.
Next week, Sotheby’s is scheduled to hold an auction featuring Asian and Chinese art, which Mr. Zuckerman said will be the auction house’s first major auction since the credit markets went south. November will offer the biggest test, as both Christie’s and Sotheby’s have auctions featuring big-ticket items, including a work by Franz Marc, which Sotheby’s expects to fetch between $20 million and $30 million, and an Andy Warhol portrait of Elizabeth Taylor, which Christie’s said could fetch $25 million.
And while some art denizens, including billionaire Eli Broad, have said that prices will be hurt significantly by the lack of money from finance players while the stock market flails, Mr. Zuckerman said that prices held up very well in the aftermath of both the market crash of October 1987 and the crisis at Long Term Capital Management in 1998.
“To some extent, when people begin to worry about the equity markets,” he said, “some of the money flows into other assets, including works of art.”
